Five warning flags that a business is failing

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Disclosure statement

Morgen Witzel does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

When companies fail, our first instinct is to start pointing fingers. Usually we point them at the people at the top – the chairman or chief executive. They were in charge, after all; the decisions that drove the company to the wall must have been made by them. Whatever went wrong is their fault. Change the leaders and the problem will go away.

But very often the problem does not go away – and this is because, in actual fact, leaders have only limited control over the organisations that they purport to lead. You can call yourself a leader and give all the orders you want, but if no one is willing to follow, then you are powerless. Euan Sutherland found this out to his cost, battering his head against the brick wall of the Co-operative’s long-established culture, and unable to make a dent.

Companies that fail very often have a culture that makes them more likely to fail. Culture is a set of established beliefs, values and ways of doing things – and the right kind of culture can be a very valuable asset to a business, or any other organisation come to that. But if the culture goes wrong – and many do – then it becomes a toxic culture, holding the company back and eventually dragging it down.

That’s not to say that the chairman and CEO have no responsibility for company failures. For a start, one of the key jobs of the leader is to manage their organisation’s culture and make sure toxic elements don’t creep in. The warning signs are easy to spot, if you know what they are and where to look for them. Here are five of the most common:

1. Complacency

The sin of complacency has killed many companies in the past, and has cost many others their market dominance and profits. Just because the firm has been successful in the past, it doesn’t mean it will go on being successful in the future. Think of Kodak. For generations it was the world leader in the camera market and paid little attention to the looming threat from digital photography until it was too late. Now, Kodak is no more.

Clayton Christensen of Harvard Business School calls this the “innovator’s dilemma”. A company rises to prominence by doing something really well, better than anyone else. The company then becomes so proud of its technology and ideas that it rests on its laurels.

It stops innovating because it believes there is no need to carry on. We’ve won, the thinking goes; we’re on top, and no one can touch us. Then along comes a disruptive technology or business model, the game changes and the old certainties go out the window. When the company does try to shift and adapt, it is usually too late.

2. An obsession with ‘winning’

Companies that boast about their revenues, their profits, their market share and other signs of growth as though these were the only things that matter are setting themselves up to fail. Growth is a mirage that has claimed the lives of many companies and the careers of many executives. Dutch company Royal Ahold set itself the goal of becoming the world’s largest supermarket group. Like the Monty Python character Mr Creosote, Royal Ahold gobbled up everything in its path – and then exploded.

Executives who talk about “winning” over their competitors have forgotten what business is for. The purpose of a business is not to win. It is to serve its customers.

3. Constant changes

If it ain’t broke it’s because you haven’t looked hard enough. Fix it anyway.

So said Tom Peters in his book on management, Thriving in Chaos. This belief that change is a constant and that any change is for the better is a popular view in many companies.

Restructuring, in particular, is a common response when no one can think of what else to do. Constant change and churn, constant turnover of people, constant restructuring, chaos and confusion also distract companies from their real goal, serving customers. An atmosphere of constant turbulence is a clear danger signal.

4. Errant executives

Another surprisingly frequent warning sign that a business is in danger is when executives make more headlines in the bedroom than in the boardroom. A couple of years ago, the Financial Times ran an article about (male) executives having testosterone injections to boost their confidence and make them more, well, more masculine. Bad idea. The problem in business today is too much testosterone, not too little.

Macho businesses should a thing of the past, but they are not. Sexual discrimination and harassment remain rife in many workplaces. Some senior executives still seem to think they can behave like Neanderthals and get away with it. These days, they can’t. The internet loves nothing more than sex, and stories of boardroom peccadilloes will go viral in a matter of hours.

This matters because once again these stories distract people from the real purpose of business – yes, serving customers. And partly because cultures where people are irresponsible about sex are also places where people are irresponsible about other things too. Trust, loyalty, transparency are all essential to good business.

5. Prioritising numbers over people

There is a prevalent idea in many businesses that you can’t manage what you can’t measure. But there are all sorts of things – trust, knowledge, initiative, entrepreneurship, and of course culture itself – that must be managed and yet cannot be effectively measured. Any company that chains itself to metrics and refuses to engage with the soft side of business is riding for a fall.

There are many more warning flags to look out for in a failing business, from “heroic” leaders surrounded by nodding dog executives to cynicism and lack of purpose. But these are five of the key ones which, if allowed to continue, will likely result in a business going bust.